Encore Capital Group Inc

Good day, everyone, and thank you for standing by. Welcome to the Encore Capital Group's fourth quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you need to press star 11 on your telephone. You'll then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Bruce Thomas, Vice President of Global Investor Relations for Encore. Bruce, please go ahead.

Thank you, Operator. Good afternoon, and welcome to Encore Capital Group's fourth quarter 2025 earnings call. Joining me on the call today are Ashish Masih, our President and Chief Executive Officer, Tomas Hernandez, Executive Vice President and Chief Financial Officer, Ryan Bell, President of Midland Credit Management, and John Young, President of Cabot Credit Management. Ashish and Tomas will make prepared remarks today, and then we'll be happy to take your questions. Unless otherwise noted, comparisons on this conference call will be made between the fourth quarter of 2025 and the fourth quarter of 2024, or between the full year 2025 and the full year 2024. In addition, today's discussion will include forward-looking statements that are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially from our expectations. Please refer to our SEC filings for a detailed discussion of potential risks and uncertainties. We undertake no obligation to update any forward-looking statement. During this call, we will use rounding and abbreviations for the sake of brevity. We will also be discussing non-GAAP financial measures. Reconciliations for the most directly comparable GAAP financial measures are included in our investor presentation, which is available on the investor section of our website. As a reminder, following the conclusion of this conference call, a replay along with our prepared remarks will also be available on the Investors section of our website. With that, let me turn the call over to Ashish Massey, our President and Chief Executive Officer.

Thanks, Bruce, and good afternoon, everyone. Thank you for joining us. On today's call, I will start with a high-level recap of 2025. Then I'll review our strategy and market position, as well as our view on how we create value for our shareholders. This will be followed by a few key measures that are important indicators of the state of our business and a 2025 recap of our MCM and Cabot businesses. Then, Tomas will review our financial results, after which I'll touch on our financial objectives and priorities and provide guidance on several key metrics for 2026. At the conclusion of today's call, we will also post to our website. our annual report, which includes our 10K and my letter to shareholders. We will begin with a look back over the past year. With the momentum of a largest business, MCM leading the way in the US, Encore delivered very strong results in 2025. For the full year, we grew portfolio purchases by 4% to a record $1.4 billion and increased collections by 20% to a record $2.6 billion. Average receivable portfolios increased 12% to $4.1 billion and estimated remaining collections or ERC rose 14% to a record $9.7 billion. These results clearly demonstrate OnCourse leadership in the consumer debt purchasing industry and reflect the strengthening of our operating model through exceptional execution and investments and innovation. I'll provide more detail on both MCM's results and Cabot's performance later in the presentation. Our leverage improved to 2.4 times at the end of the year compared to 2.6 times a year ago. Importantly, we continue to improve and de-lever our balance sheet, even with continued significant portfolio purchases as well as the resumption of our share repurchase program early in the year. We repurchased approximately 9% of our outstanding shares in 2025 for approximately $90 million, reflecting our confidence in OnCore's future performance. Our record collections performance in 2025 led to $257 million of net income for the year, or earnings per share of $10.91. Before I continue, I believe it's helpful to remind investors of the critical role we play in the consumer credit ecosystem by assisting in the resolution of unpaid debts. These unpaid debts are an expected outcome of the lending business model. Our mission is to create pathways to economic freedom for the consumers we serve by helping them resolve their past due debts. We achieved this by engaging consumers in honest, empathetic, and respectful conversations. We pursue our business objectives through our three-pillar strategy of participating in the largest and most valuable markets, developing and sustaining a competitive advantage in these markets, and maintaining a strong balance sheet. We employ a strategy across our two main businesses, Midland Credit Management, or MCM in the U.S., and Cabot Credit Management in select European markets. We believe value is created in the consumer debt buying industry through optimal execution of three critical drivers, buying, collecting, and funding. When these drivers are executed well within attractive markets, leveraging the resources we possess and a strong balance sheet, we believe they enable high consistent returns and profitability. I'll take a moment to describe each of these three critical drivers of our value engine, which form the virtuous cycle of buying well, collecting efficiently, and funding competitively. The cycle begins with a commitment to purchase portfolios of charged off receivables and attractive returns, which is the buy well component of our value engine. Over the many years of our industry leadership, we have built a trusted reputation with the sellers of portfolios, the largest credit card issuers, which provides us access to bid on the opportunities we seek. Our disciplined portfolio purchasing is underpinned by superior data and analytics capabilities, which, when applied to a very large data set stemming from our scale and history, optimize portfolio valuation through account-level underwriting. As a result, we win more portfolios at strong returns enabled by our superior collections as reflected in our industry-leading portfolio yield and collections yield. The cycle continues with our commitment to collect efficiently, maximizing net collections to realize strong yields. Our operational excellence, advanced analytics, and a consumer-centric approach produce industry-leading yields while still exhibiting a solid cash efficiency margin. Because of our large scale, We have a broader reach within the portfolios we buy than our competitors. As we often see consumers, we have come to know in previously purchased portfolios. As a result, a very effective personalized engagement with consumers leads to payments with predictable, consistent cash flow. This cash flow helps to complete the cycle as it contributes to our commitment to fund competitively. based on low cost funding and a strong balance sheet. Importantly, our balance sheet strength enables access to capital at competitive costs through the credit cycle. In summary, OnCore's value engine is the critical enabler of our competitive advantage that allows us to execute our proven three pillar strategy to drive shareholder value. I would now like to highlight OnCore's performance for the year in terms of several key metrics, starting with portfolio purchasing. Oncord's global portfolio purchases for 2025 were a record $1.4 billion, an increase of 4% compared to 2024. Keep in mind that the comparison to the prior year purchase level is impacted by the outsized $200 million of portfolio purchasing by Cabot in the fourth quarter of 2024. As a result of the attractive market conditions and higher returns available in the United States, 83% of our portfolio purchasing dollars were spent in the U.S. in 2025. Global collections in 2025 were up 20% to a record $2.6 billion. This exceptional collections performance is a result of strong execution and continued significant portfolio purchasing as well as the deployment of new technologies, enhanced digital capabilities, and continued operational innovation, especially in the U.S. Our global collections performance in 2025 compared to our ERC at the end of 2024 was 109 percent. We believe that our ability to generate significant cash provides us with an important competitive advantage, which is also a key component of our three-pillar strategy. Similar to the collections dynamic I mentioned earlier, strong execution, higher portfolio purchases at strong returns over the past few years, as well as operational improvements, have also led to meaningful growth in cash generation. Our cash generation in 2025 was up 22% compared to the prior year, and we expect it to continue to grow. Let's now take a look at our two largest markets, beginning with the US. The US Federal Reserve reports that revolving credit in the US remains near record levels. At the same time, since bottoming out in late 2021, the credit card charge-off rate in the US increased to its highest level in more than 10 years in 2024 and still remains at an elevated level. The combination of strong lending and elevated charge-off rates continues to drive robust portfolio supply in the US. Let me illustrate this impact by highlighting the annualized amount of net dollar charge-offs, which can be estimated by multiplying revolving credit outstandings by the net charge-off rate. Using Q3 2025 data, the most recent quarter reported by the Federal Reserve, annualized net charge-off volume was more than $54 billion. Similarly, U.S. consumer credit card delinquencies, which are a leading indicator of future charge-offs, also remain near multi-year highs. With the revolving consumer credit at an elevated level and the charge-off rate above 4%, purchasing conditions in the U.S. market remain favorable. We are observing continued strong U.S. market supply and favorable pricing as well. Fourth quarter delinquency data supports our expectation that the portfolio purchasing environment in the U.S. is expected to remain robust for the foreseeable future. With portfolio supply in the U.S. market growing to its highest level ever in 2025, we purchased significantly more portfolio than we ever have in the U.S. MCM leaned into this opportunity by finishing the year with a record $1.17 billion of portfolio purchases, up 18% compared to the previous record high in 2024. That's an increase of $175 million on a year-over-year basis. In addition to solid portfolio purchases in 2025, our MCM business continues to excel operationally. MCM collections increased in 2025 to a record $1.95 billion, which was an increase of 24% compared to 2024. Our collections momentum continued throughout 2025 with Q4 collections of $503 million highest collections quarter ever for our U.S. business. The collections overperformance in the U.S. was driven by the deployment of new technologies, enhanced digital capabilities, and continued operational innovation, which enabled us to reach more consumers, leading to more payments, as well as a large and growing pair book. These initiatives had a greater impact on the early stages of the portfolio's life cycle, leading to overperformance of our recent vintages. We expect that our collections forecasts will gradually adjust to reflect the positive impact of these initiatives. Our outstanding results not only reflect the improvements we've made in our collections operation and the overall effectiveness of our collection platforms, but also the strength of the U.S. consumer. Despite some of the negative news and macro uncertainty in the U.S., our consumers payment behavior remains stable. This is in line with what many of the bank and credit card issuers are saying in the recent earnings calls. We, of course, continue to monitor for any signs of change. Turning to a business in Europe, Cabot delivered a solid year of performance in 2025. Cabot collections in 2025 were $641 million, up 9% compared to 2024. We continue to be focused on Cabot's operational excellence and cost management, including leveraging relevant best practices from our MCM business. This is particularly relevant in the UK, where banks are increasingly selling fresh portfolios and forward flows. Our operational focus and initiatives have enabled Cabot to continue to deliver stable collections performance. Cabot's portfolio purchases in 2025 with $234 million, which is in line with the historical trend, but lower than 2024 due to the exceptional Q4 2024 purchases of $200 million that included large, attractive spot market portfolio purchases. We continue to be selective with CABUS deployments as the UK market remains impacted by subdued consumer lending and low delinquencies, in addition to continued robust competition. I'd now like to hand the call over to Tomás for a more detailed look at the financial results.